Sunday, July 22, 2012

House Republicans Press Federal Reserve Not to Aid Economic Recovery – Whose Side Are They On? (hint: it's not yours)

No There is Little the Fed Can Do – but Republicans Want to Make Sure Even That Little is Not Done

Major economists have a lot of difficulty accepting the fact that Federal Reserve Chairman Ben Bernanke has run out of ammunition in his efforts to strengthen the economic recovery.  Paul Krugman, who probably knows this but is desperate for somebody to do something says this.

July 18, 2012, 9:30 AM

The Feckless Fed

Hmm. When I published a critique of Ben Bernanke’s recent performance, suggesting that he should reread his own critiques of the Bank of Japan, there were a fair number of people saying that I was just a big meanie.
But my sense is that his latest testimony, in which he declared that the Fed has the power to take action, that the economy is in really bad shape, but declined to, you know, actually take action, has left even his usual defenders more or less speechless.
It really makes no sense — except in terms of politics. I really believe that we have reached a point where the Fed is afraid to do its job, for fear of being accused of helping Obama.

Mr. Krugman may be right about the Fed being afraid of Republicans, but the problem is that the Fed has simply no options available to it.  It has made interest rates so low that any additional lowering just has no effect.  If business will not borrow to invest when their rates are 3%, they will not borrow and invest just because their rates have dropped to 2.5%.  Low rates are a necessary but not sufficient condition for higher economic growth.

House Republicans are terrified though that Mr. Bernanke and the Fed might aid the economy even a little, which although it would be great for the country would be bad for Republicans.  So they are telling the Fed not to act, not to do anything to aid ordinary Americans.

Mr. Bernanke avoided any commitments to additional action during two days of Congressional testimony, but he told a Senate committee on Tuesday that the Fed was prepared to act if it concluded that job growth had stalled.
Republicans on the House Financial Services Committee, which hosted Mr. Bernanke on Wednesday, wasted little time in responding.

“The truth is, the Federal Reserve cannot rescue Americans from the consequences of failed economic and regulatory policies passed by Congress and signed by the president,” the committee chairman, Representative Spencer Bachus of Alabama, said in his opening statement.

Other Republicans cautioned that an expansion of the Fed’s existing efforts could deepen the nation’s financial challenges by postponing a necessary reckoning and eventually accelerating the pace of inflation.

Of course, there is no fear of inflation, in fact higher inflation would be a good thing right now as it would boost nominal income, weaken the dollar to stimulate exports and represent increased demand for goods and services leading to higher investment.  This is just a cover, Republicans are deathly afraid an improving economy will hurt their chances in November.

And of course if you are a Republican, election politics is all that counts.  If Americans have to suffer higher unemployment and lower economic growth to further Republican political ambitions, well that’s just too bad isn’t it.  After all members of Congress have a salary many times the median family income, a great retirement plan and oh yes, government provided and subsidized health care.  Staying in office, that’s all that’s important to them. 

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